Buy Infosys With A Target Price of INR 2,310 Suggests Motilal Oswal

Investment rationale for Infosys according to Motilal Oswal

• Manufacturing growth in 3QFY22 was aided by a ramp-up in the Daimler deal. The management sees strong traction in areas of Smart Manufacturing and IoT. Infosys is seeing very good traction in Digital and Cloud initiatives. The management has again upgraded its revenue growth guidance. The same now stands at 19.5-20% YoY CC (v/s its earlier guidance of 16.5-17.5% YoY CC). The demand environment is so strong that it doesn't want to leave anything on the table. Hence, it is continuing with the pace of hiring and sub-contracting despite the costs. It now has a fresher hiring target of 55k in FY22 v/s 45k earlier and higher pricing is flowing into newer deals, which should aid margin in FY23.
• Infosys reported a growth of 7% QoQ CC, ahead of our estimate of 4.8%, on the back of a broad-based performance. Large deal TCV stood at USD2.53b (net new at 44%). The management indicated traction in large deals and highlighted that the deal pipeline was the highest in a very long time.
• EBIT margin dipped only 10bp QoQ to 23.5%, in line with our estimate, despite a drag from employee additions (12.5k), higher sub-contracting, and lower utilization (-70bp QoQ) in 3QFY22. A strong topline growth drove PAT growth of 7.2% QoQ to INR58b.
• With an exceptional 3Q performance in topline, Infosys increased its FY22 USD revenue growth guidance to 19.5-20% YoY CC (from 16.5-17.5%). While we anticipated a more modest guidance raise, growth in 3Q will ensure that its FY22 revenue growth will again beat its latest guidance by 100bp. Good revenue growth in 2HFY22 will also help it deliver high teens growth in FY23, which would be viewed positively by investors.
• Moreover, the commentary around improving pricing and attrition should ease any concerns on margin going forward. While there was a sharp jump in LTM attrition (550bp), the management indicated that it has stabilized on a quarterly annualized basis (a sentiment echoed by its peers also), and should start moderating going forward. We expect the company to improve its EBIT margin by 60bp to 24.3% in FY23E.

Buy With A Target Price of INR 2,310

Motilal Oswal has said in its research report that "Infosys delivered a strong performance in 3QFY22. We expect it to deliver top quartile growth in FY22E given its strong capabilities and ramp-up in large deal wins. We expect the margin to sustain at the top end of its guidance band, led by: 1) strong topline growth and resultant operating leverage, 2) further flattening of the pyramid, and 3) continued operating efficiency measures. While there are near-term headwinds on the supply-side, we expect them to normalize in the next couple of quarters."

The brokerage has also claimed that "Infosys remains our top pick in the IT Services space due to its headroom for increased growth potential, which was further reinforced by its 3QFY22 earnings. As Infosys has been outperforming TCS, we expect no valuation divergence between the two companies. Based on our revised estimates, the stock is currently trading at 28x FY23E EPS. We value the stock at 30x FY24E EPS, implying a target price of INR2,310."

Disclaimer

The above stock has been picked from the brokerage report of Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.